How tight are your margins?

How tight are your margins?

As my grandmother used to say “Watch the pennies and the pounds will look after themselves!”.

Your grandmother’s household economics philosophy is perhaps not the most widely accepted method of company financial control but it works!

In any business you can only be guaranteed success if you look after the margins within your business carefully. Many companies fail because the people running them are too focused on turnover at the expense of watching the margins.

A Case Study

A fellow consultant recently started working with a young company which on the face of it looked to be successful.

Their main line of work was in a high value innovative technology and the demand for their services was high. They regularly achieved an annual turnover in excess of £10m! However, when my friend looked seriously at their finances he found out that their overheads were too high, income was outstripping income by around 30% on a monthly basis, they were incurring significant international shipping costs for equipment which wasn’t being passed onto their customer via the Cost of Sale and they were not accounting for upcoming demands on their cash flow.

The result was a company in dire straits that in reality was only a few weeks away from bankruptcy. When my friend pointed this out to the company owners there was complete denial and an unwillingness to make urgent and fundamental changes to the cost base of the company. My friend had no other option but walk away!

Turnover is vanity, margins are sanity

The old adage “Turnover is vanity, margins are sanity” springs to mind!

This is especially true in the tourism sector where business is normally very seasonal and largely dependent on external factors such as the weather.

Unless your business is well controlled, you have your overheads in check and you operate the various parts of your business on a good profit margin then you will find it very difficult to be successful.

Controlling Your Overheads

Staff Costs

In most tourism businesses the largest single overhead cost is staff. It is a continual challenge to find the right balance between staffing levels and income. As responsible employers we must treat staff fairly by providing them with rates of pay which adequately reflect the work we expect them to do, the hours they work and of course how our competitors pay.

Several tourism companies still rely heavily on zero hour contracts to control their costs. These contracts may well suit some employees who like the flexibility they provide. However, the flexibility they give you as an employer also comes with a risk. The staff may not be available when you need them to work and the best staff will gravitate towards other companies that commit to provide them with set hours.

The only effective way to optimize your staff costs in relation to your business need is to track and predict visitor numbers. Aim to have a staffing level which can accommodate both the highest and lowest footfall that can be anticipated for any given day and build in a portion of flexibility.

Energy

Normally the second largest portion of your overheads will be energy costs. Some attractions have inherently low energy requirements (outdoor attractions, museums, etc) whilst others (theme parks, aquariums, water parks/swimming pools, etc) will have a far higher demand for power.

It is vitally important that you review your energy supply contracts on a regular basis. Use some of the excellent cost reduction companies such as Business Cost Saving to help you negotiate the best possible deals on energy supply. In some cases these companies can achieve savings of up to 20% when compared to your current supplier.

The next stage is to carry out an energy usage review to identify where you can cut down on energy consumption.

Other Overheads

By reviewing all of your principle fixed and variable costs you can be assured that you are controlling, as much as possible, your business costs.

Margin Control

Whilst you may not be able to control how many customers visit your attraction you can certainly control how much money you make from each of them.

Income streams are generally split between ticket sales, retail, catering and secondary income streams such as corporate hospitality.

Retail operations should operate on a Gross Profit margin of around 45% but in some cases it is possible to push this up to nearer 60% without significantly impacting customer satisfaction levels.

Catering very much depends on your infrastructure and menu offerings. In the majority of attractions our customers expect us to provide them with a full spectrum of menu’s which dilutes the possible Gross Profit margins. There are always ways of optimizing this situation though and margins in the region of 15-20% should not be too difficult to achieve.

Ticket sales, for fee bases attractions, are always going to be your single biggest income stream. Finding the right price for a ticket is an art and requires excellent local knowledge, a high degree of customers understanding, accurate competitor analysis and a degree of gut feel. However, if you get your entry price wrong and try to charge too much your customers won’t be slow to tell you!

Secondary income streams such as corporate hospitality can often provide very healthy margins and are an excellent way to supplement your primary income streams. Indeed, I would argue that, unless they are providing an excellent profit margin they are not worth risking distracting you and your staff from your core business.

 The Benefits of having a fit business

If you can assure yourself, and more importantly if your accountant agrees with you, that your overheads are properly controlled and that your income streams operate with a healthy profit margin then you will be in the best possible position to optimize the income potential of customers when they decide to visit your business.

However, if you are bleeding cash through excessive overheads and your income streams aren’t performing well then no matter how busy you are your tourism business will never be as successful as you would want it to be.

For help reviewing your Operation please get in touch. All communication is carried out in strictest confidence.

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